AEB 3103 Principles of Food and Resource Economics
Module 9: Consumer
theory and decision making
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Why does watermelon chunk sells much more expensive than an entire
watermelon?
If you only have $50 to buy food for the next 14 days, what do you
buy and eat?
Decision rule
Humans make decisions depend on comparing costs with benefits: if
benefits > cost, do it. Otherwise, don’t do it.
But what are the “costs” of choosing something?
Recall opportunity cost: Because resources are scarce, the
true cost of anything is what you must give up to get it.
Explicit vs. implicit cost
- An explicit cost is a cost that requires an outlay of money
- An implicit cost does not require an outlay of money; it is measured
by the value, in dollar terms, of benefits that are forgone
- Opportunity cost = Total explicit cost + Total
implicit cost
Accounting vs. Economic profits
- Accounting profit = revenue – explicit cost
- Economic profit = revenue – opportunity cost = revenue – (explicit
cost + implicit cost)
Phil and Claire Dunphy (USA)

In The Price of Motherhood, Ann Crittenden claims the total cost for
a college-educated couple to have a child is $1
million. She discusses the following items as costs of an educated woman
having a child. Are these costs explicit, implicit, or neither?
- Unearned Social Security credits
- Forgone promotions
- Salary lost by not working
- Expenses for baby’s room
- Loss of experience at work
- Depreciation of work skills
- Food and clothing for the child
- Loss of pension and 401k benefits
- Awards and kudos for excellence doing a paid job
- Babysitting fees
- Preschool expenses
- Earnings from paid work contributed by an employer to a retirement
account
- Doctor visits & medical expenses
- Costs of decorating child’s room
- Lost training opportunities at work
Fertility rate in
- US: 1.64 birth per woman
- Columbia: 1.74 birth per woman
- Kenya: 3.4 birth per woman
The implicit cost of capital
- Capital is the total value of assets owned by an individual or
firm—physical assets plus financial assets.
- The implicit cost of capital is the opportunity cost of the use of
one’s own capital; that is, the income earned if the capital had been
employed in its next best alternative use (e.g., forgone interest
income).
The inflation reduction act will invest $370 billion in the next 10
years.

- HLB (citrus greening) has plagued 95% of Florida’s citrus trees
- No known cure (IFAS is working on it). Causes decrease in yield and
sweetness
- “Old citrus trees never die; they just fade away”
- In the meantime, citrus growers receive constant offers from real
estate developers (why?) and solar farm operators
- What is the opportunity cost of keep a five-generation citrus
farm?
“HOW much” vs. “Either-or” Decisions
There are two different types of decisions: * A choice between two
alternatives (“either–or”) * A more complex choice that requires us to
choose at the margin (“how much”) - “Should I go to college? - Should I
take an extra year in school?”
Principle of “either–or” decision making
- When faced with an “either–or” choice between two activities (all
else equal), choose the one with the positive economic profit.
- I have citrus farm of 1,000 acres of with an annual profit of $400
per acre. The developer is offering me $20,000,000 per acre to buy my
farm.
- “How much” is a decision at the margin.
- Marginal analysis: comparing the benefit of doing a little bit more
of something with the cost of doing little bit more of
something—comparing marginal benefit with marginal cost.
- Marginal cost of producing a good or service is the additional cost
incurred by producing one more unit of that good or service.
- Marginal benefit of consuming a good or service is the addition
benefit generated by consuming one more unit of that good or
service
The marginal cost curve shows how the cost of producing one more unit
depends on the quantity that has already been produced. * Each product
has a unique marginal cost. Some basic shapes: Increasing marginal cost:
Each additional unit costs more to produce than the previous one (for
example, because of paying costly overtime wages). * Constant marginal
cost: Each additional unit costs the same to produce as the previous one
(in plant nurseries, for example, the cost of growing one more plant is
the same regardless of how many plants have been produced). * Decreasing
marginal cost: Each additional unit costs less to produce than the
previous one (often due to learning effects in production when workers
gain skills and experience).

Total Cost versus Marginal Cost
It can be easy to conclude that marginal cost and total cost must
always move in the same direction.
But if the marginal cost of producing the first widget is $5, the
second $4, and the third $3, total cost rises as marginal cost
falls.
Marginal Benefit
- Marginal benefit: the additional benefit derived from producing one
more unit of a good or service
- There is decreasing marginal benefit from an activity when each
additional unit of the activity yields less benefit than the previous
unit.
- The marginal benefit curve shows how the benefit from producing one
more unit depends on the quantity that has already been produced.